Central banks may fail to slow a real estate boom by raising interest rates, forcing them to use financial regulations instead to prevent a bubble, former U.K. Financial Services Authority Chairman Adair Turner said.
Regulators should raise capital requirements for banks holding real estate assets and limit how much they can lend in relation to borrowers’ income if house-price gains accelerate, Turner said in prepared remarks for a speech he will give in Chicago today.
“Those levers need to be more robust and more extensive than those so far agreed within the global regulatory reform program,” said Turner, who took over the FSA a week after the collapse of Lehman Brothers Holdings Inc. in September 2008.
Turner said last month that Britain risks repeating the debt-fueled binge that led to the credit crisis, following government policies to stoke the housing market. U.K. house prices rose for the ninth month in a row in October as low interest rates and an improving economy boosted demand, according to a study published by Halifax yesterday.
The global financial system produces too much debt, Turner will say in the speech, with “only a small proportion of credit expansion” financing the real economy. A tax on some borrowing may help to “lean against the bias of the free market toward excess credit creation,” he said.
The U.K. government’s Help to Buy program allows people to buy homes costing as much as 600,000 pounds with as little as a 5 percent down payment. The program began in April with interest-free loans for buyers of newly built properties and the second phase -- mortgage guarantees covering most homes -- was brought forward to last month from January.
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